Reserve Bank unlikely to consider rolling back LVRs

Plummeting house sales prompted the Real Estate Institute to call on the Reserve Bank to review its loan-to-value ratio limits.

In October 2016, the Reserve Bank brought in another round of tighter loan to value restrictions. As on previous occasions, these LVR limits resulted in a slowdown in house price inflation and a softening of the market. However, this time the property market is considerably weaker than before.

In July, house sales across the country were down 25% from a year earlier. This drop is broad based across regions, with all 16 experiencing falling house sales on a three-month annual basis.

Why are house sales falling?

The effect of LVRs is only part of the picture. Floating mortgage interest rates have ticked up over the past year. And, after being downgraded by Moody’s as well as Standard and Poor’s for their high exposure to property markets, it appears that Australian-based banks are being more selective in their lending.

Adding to these downward pressures is the fact that both buyers and sellers are averse to taking a punt of property in the run up to an election.

The election is putting people off from buying and selling

A few people have looked back at house sales data and have found that there was a slowdown in house sales in the months leading up to an election. With this in mind, we expect to see some rebound (or less of a fall) in house sales once the seating arrangement at the Beehive has been settled.

The Reserve Bank’s reaction

The Bank appears to be nowhere near the removal of LVRs. First of all, the purpose of LVRs is to shore up financial stability in the banking sector. Having required banks to increase their capital base, it seems unlikely that the Reserve Bank reverse their decision. Removing or lowering deposit requirements will once again introduce more risk into financial markets.

But if we get to the point where the Bank believes the sector to be overcompensating for risk, the scaling back of LVRs is expected to be a well-signalled process. We think that any intention to remove or reduce the LVR restrictions will first be indicated in a Financial Stability report (the next one is due out in November). And the whole process will begin with consultation and then move through the decision, announcement, and implementation phases. Loan-to-value limits were brought in relatively slowly and they will be removed in a similar fashion.

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